2023-09-28 04:15:47 ET
Summary
- BARK has been working to improve its unit economics and cost structures, aiming for sustainable profitability.
- Despite these efforts, investor sentiment remains skeptical, and the stock is viewed as a "show-me" story.
- The company holds a significant amount of cash, providing flexibility for debt reduction or share buybacks, but stabilizing operations should be the primary focus for regaining investor confidence.
Investment Thesis
BARK ( BARK ) has fully fallen from grace. Looking at its chart, the immediate thought that surfaces is that of a business that's headed for bankruptcy.
However, BARK has recently made positive strides in improving its unit economics and cost structures, as it seeks to regain its footing and head for sustainable profitability. Furthermore, BARK reaffirms to investors that starting fiscal 2025, which starts in April 2024, BARK is expecting single to low double-digit top-line growth expected in fiscal '25.
All that being said, I believe investors are still skeptical of its prospects, and the stock remains a ''show-me'' story. Overall, I'm neutral on this stock but eager to track its progress more closely.
BARK's Near-Term Prospects
BARK is a dog-focused company committed to making dogs and their owners happy. They are a vertically integrated, omnichannel brand operating in two key categories: toys & accessories and consumables. BARK personalizes products and services for dogs based on their needs.
Their offerings include subscription products like BarkBox and Super Chewer, which provide themed boxes of premium-quality toys and treats, as well as consumables such as kibble and treats.
BARK leverages customer data and strong customer relationships to tailor their products. They sell their products directly to consumers and through a network of retail partners.
Recently, BARK has made some progress in improving its unit economics. Furthermore, their efforts in expanding the consumables category are backed by partnerships with major retailers, who are expected to contribute to the top line, reinforcing their position in the $40 billion consumables market. Additionally, there's the launch of BARK: Shop BarkBox, Food, Treats, Dental, and Toys. This should drive direct-to-consumer sales, as well as higher conversion rates and efficient customer acquisition.
Looking ahead, BARK anticipates continued growth, particularly in the consumables sector. As inventory levels normalize at retail partners and new orders are delivered, the toy category is showing signs of stabilization. Also, cross-selling initiatives and an increase in average order value provide avenues for revenue growth.
Given this context, let's turn our focus to BARK's financials.
Revenue Growth Rates, Far From Clear Outlooks
A few quarters back, BARK was delivering some mighty attractive revenue growth rates. Today, that's evidently not the case. Indeed, it's not only that fiscal Q1 saw negative 8% y/y revenue growth rates, but also, that the outlook for fiscal Q2 2024, this current to-be-reported quarter, doesn't exactly ooze strength.
More specifically, if we take the high end of its guidance, BARK will deliver flat y/y revenue growth rates. That being said, despite the challenging top-line comparisons in the first half of the fiscal year, BARK is confident that the top line will gain momentum in the second half.
Perhaps fiscal H2 2024 will indeed deliver 1% to 3% revenue growth rates. Nevertheless, this is hardly a business that exudes strength and stability. It's more of a situation where the company is holding on and surviving, rather than pushing forward and thriving.
And what about its financial position?
BARK's Balance Sheet Discussed
This is where the plot thickens. On the one hand, BARK has a reasonably strong balance sheet. Case in point, including its 2025 convertible notes, BARK holds approximately $80 million of net cash. For a business that's priced at $200 million, this means that close to 40% of its market cap is made up of cash. With that in mind, this is what BARK stated on the earnings call,
So our first preference is taking out our debt. So we have convertible notes that mature in 2025. To the extent we're able to take those out at some meaningful discount, that would make a lot of sense. But it would have to be a meaningful discount given the strong interest rate we're earning on our cash at present.
We continue to think also that our stock is undervalued and so if we're unable to reach a favorable agreement on the debt. Our next best opportunities to use some of our cash for a buyback program. Obviously, that's within the constraints of our debt agreement.
And then, those options aren't mutually exclusive given our strong balance sheet. We could choose to take out some or all of the convertible and buyback shares and still have plenty of cash on hand to run the business.
But this is where I don't support management's actions. Management has recently set about buying back shares in the company. It wasn't a grand sum, at around $7.5 million as BARK is restrained by the covenants on its convertibles. Nonetheless, personally, I would much rather BARK stabilize its operations rather than deploy capital to repurchase stock.
After all, I firmly believe that if the business reaches stability, investors will bid up its shares in any case. But if the business doesn't deliver stability, the stock could continue to fall. And that capital spent on share repurchases will look in hindsight to have been squandered capital.
What About Risk Factors?
As noted already, the business has ample liquidity. It has no borrowing under its revolver. And it has $35 million of available liquidity. In other words, the business is not suffering from a lack of liquidity. The issue with BARK is its lack of growth.
Indeed, BARK faces several risks in its pursuit of growth. Firstly, its ability to introduce new products and improve existing ones is essential for its success.
Secondly, to a certain extent, BARK relies on third-party sales channels to distribute its products. However, these third parties are also competitors.
Thirdly, in its direct-to-consumer business, Chewy ( CHWY ) is aggressively attempting to take market share away from BARK. In other words, BARK has no moat around its business and a lot of competitors.
That being said, despite these risk factors, BARK believes that it can be close to break even on its EBITDA line in 2023. This will soon suppress its cash burn profile.
The Bottom Line
The current situation with BARK appears to be challenging, with the company having faced a significant decline in its stock price, raising concerns about its future. While BARK has recently taken steps to improve its unit economics and cost structures, aiming for sustainable profitability, investor sentiment remains skeptical, and understandably so.
Despite recent efforts to strengthen its financial position and expand into the consumables category with the support of major retailers, BARK faces near-term headwinds. The recent negative 8% year-over-year revenue growth rate in fiscal Q1 and flat revenue growth expected in fiscal Q2 pose challenges, but the company remains confident in regaining momentum in the second half of the fiscal year.
BARK holds a substantial amount of cash, making up nearly 40% of its market cap, which provides flexibility for debt reduction and share buybacks, but I believe that stabilizing its operations should be the primary focus. This would regain investor confidence and would be a better use of capital. Overall, the outlook for BARK is uncertain. With both challenges and opportunities on the horizon, I'm eager to follow this story more closely to see how it develops from this point.
For further details see:
BARK: Waiting For The 'Show Me' Moment